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Accounting concepts and applications 11th Edition Albrecht Stice, Stice Swain - Solutions

What types of securities can be classified as “held-tomaturity”?
To be classified as an equity method security, the investor must typically own at least a certain percentage of the outstanding common stock of the investee. What is that minimum percentage? That percentage of ownership represents the investor’s ability to do what?
Identify the different types of returns an investor can realize when investing in debt and equity securities.
When a security is sold, what information must be known to account for that transaction?
What is the difference between a realized gain or loss and an unrealized gain or loss?
What does the market adjustment account represent?
How are changes in the value of trading securities accounted for on the books of the investor?
How are changes in the value of available-for-sale securities accounted for on the books of the investor?
What is the process for adjusting the value of a trading or available-for-sale security after a valuation account has been established?
Why aren’t changes in the value of held-to- maturity and equity method securities accounted for on the books of the investor?
How does the accounting for changes in the value of trading and available-for-sale securities differ?
Which one of the following is not a primary reason companies invest in other companies?a To earn return on excess cashb. To eliminate risk in other investmentsc. To gain influence over another companyd. To gain control over another company
Which one of the following types of investments is always an example of a debt security?a. Available-for-sale securitiesb. Trading securitiesc. Held-to-maturity securitiesd. Equity method securities
What is the general rule for what percentage an entity must own in another company to account for the investment using the equity method?a. The entity should own 20 to 50% of the other company’s outstanding voting stock.b. The entity should own 5 to 10% of the other company’s outstanding voting
Which two of the following classifications of securities are valued at fair value on a company’s balance sheet?a. Available-for-sale securitiesb. Equity method securitiesc. Trading securitiesd. Held-to-maturity securities
Viella Company purchased the following securities with cash:Make the necessary journal entry (or entries) to record the purchase of thesesecurities.
Refer to the data in PE 12-5. Viella Company received the following interest and dividends from its securities investments during the year:Make the necessary journal entry (or entries) to record the receipt of interest and dividends during theyear.
Refer to the data in PE 12-5. Near the end of the year, Viella Company sold Security 1 for $50,000. Make the necessary journal entry (or entries) to record the sale.
At the end of the year, Viella Company had the following securities:Make the necessary journal entry (or entries) to record the change in value of the company€™s trading security (Security3).
Refer to the data in PE 12-8. Make the necessary journal entry (or entries) to record the change in value of the company’s available-for-sale securities.
At the end of 2012, D’Espagne Company owned the following security (which was originally purchased for $60,000 and had a market value at the end of 2011 of $64,000).Classification Historical Cost Market Value
Prepare the journal entries to account for the following investment transactions of Samuelson Company:2011July 1 Purchased 350 shares of Bateman Company stock at $22 per share plus a brokerage fee of $600. The Bateman stock is classified as trading.Oct. 31 Received a cash dividend of $2.00 per
In June 2012, Hatch Company had no investment securities but had excess cash that would not be needed for nine months. Management decided to use this money to purchase trading securities as a short-term investment. The following transactions relate to the investments:July 16 Purchased 4,000 shares
Bird Beak Corporation made the following available-for-sale securities transactions:Jan. 14 Purchased 4,000 shares of Pinegar Corporation common stock at $20.80 per share.Mar. 31 Received a cash dividend of $0.25 per share on the Pinegar stock.Aug. 28 Sold 1,600 shares of Pinegar stock at $22.60
In January 2010, Solitron, Inc., determined that it had excess cash on hand and decided to invest in Horner Company stock. Solitron intends to hold the stock for a period of three to five years, thereby making the investment an available-for-sale security. The following transactions took place in
During 2010, JAT Company purchased trading securities as a short-term investment. The costs of the securities and their market values on December 31, 2012, are listed below.JAT had no trading securities in the years before 2012. Before any adjustments related to these trading securities, JAT had
In February 2012, Packard Corporation purchased the following securities. Prior to these purchases, Packard had no portfolio of investment securities.During 2012, Packard received $2,400 in interest and $1,800 in dividends. On December 31,2012, Packard€™s portfolio of securities had the
Andrews, Inc., purchased the following securities during 2012:During 2012, Andrews received interest of $1,400 and dividends of $600 on its investments. On September 29, 2012, Andrews sold one-half of Security 1 for $1,600. On December 31, 2012, the portfolio of securities had the following fair
Sharp, Inc., had the following portfolio of investment securities on January 1, 2012:Appropriate adjustments have been made in prior years. No securities were bought or sold during 2012. On December 31, 2012, Sharp's portfolio of securities had the following fair market values:Security
Indonesia, Inc., held the following portfolio of securities on December 31, 2011 (the end of its first year of operations):No additional securities were bought or sold during 2012. On December 31, 2012, Indonesia's securities had a fair market value of:Trading securities . . . . . . . . . . . . . .
The Running Store is a chain of sporting goods stores. The Running Store is interested in using some of its excess cash to invest in securities. It decides to buy the following securities:Prepare the journal entry to record the purchase of thesesecurities.
Shay Company owns the following securities, which it is interested in selling:Prepare the journal entry to record the sale of thesesecurities.
The following data pertain to the securities of Linford Company during 2012, the company’s first year of operations:a. Purchased 400 shares of Persimmon Corporation stock at $40 per share plus a commission of $200. This security is classified as trading.b. Purchased $6,000 of Kiwi Corporation
Iron Company incurred the following transactions relating to the common stock of Bronze Company:July 14, 2010 Purchased 10,000 shares at $35 per share.Sept. 4, 2011 Sold 2,500 shares at $40 per share.Aug. 24, 2012 Sold 1,500 shares at $33 per share.The end-of-year market prices for the shares were
Lorien Technologies, Inc., purchased the following securities during 2011:The following transactions occurred during 2012:a. On January 1, 2012, Lorien purchased Security E for $12,000. Security E is classified as available-for-sale.b. On March 23, 2012, Security B was sold for $4,700.c. On July
In December 2012, the treasurer of Toth Company concluded that the company had excess cash on hand and decided to invest in Soren Corporation stock. Toth intends to hold the stock for a period of 6 to 12 months and classifies the security as trading. The following transactions took place:Jan. 1
Wilbur Company often invests in the debt and equity securities of other companies as short-term investments. During 2012, the following events occurred:July 1 Wilbur purchased the securities listed here:Sept. 30 Wilbur received a cash dividend of $2,460 on Security 2.Dec. 1 Wilbur sold Security 4
JAG Manufacturing Company produces and sells one main product. There is significant seasonality in demand, and the unit price is quite high. As a result, during the heavy selling season, JAG generates cash that is idle for a few months. The company uses this cash to acquire investments. The
The following data pertain to the investments of Summer Company during 2012, the company’s first year of operations:a. Purchased 200 shares of Winter Corporation stock at $40 per share, plus brokerage fees of $100. Classified as trading.b. Purchased $10,000 of Spring Corporation bonds at face
Lindorf Company often purchases common stocks of other companies as long-term investments. At the end of 2011, Lindorf held the common stocks listed. (Assume that Lindorf exercises no significant influence over these companies; that is, they are classified as available-for-sale
On January 1, Heiress Company had surplus cash and decided to make some long-term investments. The following transactions occurred during the year:Jan. 1 Purchased thirty $1,000, 11% bonds of McComb Corporation at face value. Semiannual interest payment dates are January 1 and July 1 each year. The
On March 15, 2012, Boston Company acquired 5,000 shares of Richfield Corporation common stock at $45 per share as a long-term investment. Richfield has 50,000 shares of outstanding voting common stock. Boston does not own any other stocks. The following additional events occurred during the fiscal
General Corporation has the following investments in equity securities at December 31, 2011 (there are no existing balances in the market adjustment account):Required:1. Prepare any adjusting entries required at December 31, 2011.2. Illustrate how these investments would be presented on General's
Pentron Data Corporation has a significant amount of excess cash on hand and has decided to make a long-term investment in either debt or equity securities. After a careful analysis, the investment committee recommends that Pentron purchase either one of the following two investments. The first
Memphis Company has just purchased five securities; it intends to hold the stock until the price increases to a sufficiently high level, at which time it plans to sell the stock. In fact, it is unlikely that the company will hold the securities for more than a few months. Nevertheless, Memphis’s
Should the investment securities that companies own be left on the books at historical cost, or should they be adjusted annually to their current market price (as is now required by GAAP)?When physical assets are purchased, they are recorded on the balance sheet at cost and left there until the
Locate Microsoft’s 2008 annual report at www.microsoft.com to answer the following questions:1. Find Microsoft’s note on accounting policies. Using the information in that note (under the heading “Financial Instruments”), determine what fraction of Microsoft’s investment securities are
Sony Corporation was organized in 1946 under the name Tokyo Tsushin Kogyo. The name "Sony" was given to a small transistor radio sold by the company in the United States. The radio was so popular that the entire company changed its name to Sony in 1958.In its 2008 and 2007 annual reports, Sony
You have recently been hired as a staff assistant in the office of the chairman of the board of directors of Clefton, Inc. Because you have some background in accounting, the chairman has asked you to review the preliminary financial statements that have been prepared by the company’s accounting
What future cash inflows is a company buying when it purchases a held-to-maturity security?
When would a company be willing to pay more than the face amount (a premium) for a held-to-maturity security?
Why does the amortization of a discount increase the amount of interest revenue earned on a held-to-maturity security?
Why must an investor purchasing held-to-maturity securities between interest payment dates pay the previous owner for accrued interest on those securities?
Why is the effective-interest amortization method theoretically superior to the straight-line method?
What is the key criterion for using the equity method of accounting for equity securities?
What guidelines have been provided to determine if the ability to significantly influence the decisions of an investee exists?
How does the equity method of accounting for securities differ from the procedures employed for a trading security?
Under what circumstances should consolidated financial statements be prepared?
What financial statement accounts are shown only in consolidated financial statements and never in the financial statements of individual companies?
On January 1, 2012, Twomey Company purchased thirty $1,000 held-to-maturity bonds of another company. The bonds mature in four years from the date of issuance and pay interest at a stated annual rate of 8%, with payments to be made quarterly on March 31, June 30, September 30, and December 31. The
Using the information from PE 12-50, make the necessary journal entry to record the purchase of this held-to-maturity security.
NPP Company purchased $100,000, 10%, three-year bonds for $86,780. Interest on the bonds is payable semiannually. Using straight-line amortization of the bond discounts, make the necessary journal entry (or entries) to be made at each interest payment date to record the semiannual interest payment.
Walsh Company purchased $65,000, 10%, three-year bonds for $68,407.39. Interest on the bonds is payable semiannually. Using straight-line amortization of the bond premiums, make the necessary journal entry (or entries) to be made at each interest payment date to record the semiannual interest
Refer to the data in PE 12-53. Using the effective-interest method of bond premium amortization, make the necessary journal entries to record the first two interest payments received on the bonds.
Refer to the data in PE 12-53 and 12-54. Walsh decided to sell the bonds for $67,000 immediately after receiving the second interest payment. Make the necessary journal entry (or entries) to record the sale of these bonds. Assume that the effective-interest method of amortization is used.
Manwill Company owns 40% (30,000 shares) of Hall Company’s voting stock. Since Manwill has a significant interest in Hall, it uses the equity method of accounting for the investment. Hall reported the following information for the year:1. Hall earned net income of $80,000.2. Hall paid dividends
Parent Company owns 90% of the outstanding stock of Sub Company. At the end of the year, Sub reports revenues of $240,000 and expenses of $170,000. What will Parent report on its own financial statements as “Income from Sub”? On the consolidated financial statements, how much of Sub’s
1. How much should an investor pay for $500,000 of debenture bonds that pay interest every six months at an annual rate of 12%, assuming that the bonds mature in 10 years and that the effective interest rate at the date of purchase is also 12%?2. How much should an investor pay for $100,000 of
McMinville Corporation has decided to purchase bonds of La Verkin Corporation as a long-term investment. The 10-year bonds have a stated rate of interest of 12%, with interest payments being made semiannually. How much should McMinville be willing to pay for $150,000 of the bonds if:1. A rate of
Control Group purchased thirty $1,000, 10%, 20-year bonds of Natchez Corporation on January 1, 2012, as a long-term investment. The bonds mature on January 1, 2032, and interest is payable every January 1 and July 1. Control’s reporting year ends December 31, and the company uses the
On their issuance date, Salina Company purchased thirty-five $1,000, 10%, six-year bonds of AF Corporation as a long-term investment for $38,285. Interest payments are made semiannually. Prepare a schedule showing the amortization of the bond premium over the six-year life of the bonds.Use the
Assume the same facts as in E 12-61. Prepare a schedule showing the amortization of the bond premium over the six-year life of the bonds. Use the effective-interest method of amortization.
On January 3, 2012, Jorgenson, Inc., purchased 40,000 shares of the outstanding common stock of Horace Corporation. At the time of this transaction, Horace has 100,000 shares of common stock outstanding. The cost of the purchase (including brokerage fees) was $23 per share. During the year, Horace
Foster Enterprises purchased 20% of the outstanding common stock of Novelties, Inc., on January 2, 2012, paying $150,000. During 2012, Novelties reported net income of $20,000 and paid dividends to shareholders of $15,000. On December 31, 2012, Foster’s investment in Novelties stock had a fair
During 2012, Genco Corporation purchased 10,000 shares of Wiener Company stock for $85 per share. Wiener had a total of 40,000 shares of stock outstanding.1. Prepare journal entries for the following transactions:Jan. 1 Purchased 10,000 shares of common stock at $85.Dec. 31 Wiener declared and paid
Ecotec Inc. purchased 70% of the outstanding common stock of Beatrix Co. on January 1, 2010, paying $875,000. On that day, the balance sheets of the two companies immediately after the purchase are as follows:1. Compute the amount that will be disclosed on the consolidated balance sheet as
On January 1, 2010, Limbo Inc. purchased 80% of the outstanding common stock of Euphoria Co. at a price of $1,200,000. At the end of 2010, each company prepared separate income statements, which are presented on the following page.1. Compute the amount that will be reported on the consolidated
Eysser Corporation purchased $50,000 of Hillside Construction Company’s 10% bonds at l03⅞ plus accrued interest on February 1, 2011. The bonds mature on April 1, 2018, and interest is payable on April 1 and October 1. Eysser uses the straight-line method of amortizing bond premiums and
On January 1, 2012, Eurowest Company purchased a $40,000, 8% bond at 104 as a long-term investment. The bond pays interest annually on each December 31 and matures on December 31, 2014.Assuming straight-line amortization, answer the following questions:Required:1. What will be the net amount of
Corbett Corporation decided to purchase twenty $1,000, 10%, six-year bonds of Texas Manufacturing Company as a long-term investment on February 1, 2011. The bonds mature on February 1, 2017, and interest payments are made semiannually on February 1 and August 1.Required:1. How much should Corbett
Walsh Equipment Company made the following purchases of debt securities during 2012. All are classified as held-to-maturity, and all pay interest semiannually.Required:1. Prepare journal entries for the purchases.2. Show all adjusting entries relating to the bonds on December 31, 2012, assuming
Century Corporation acquired 8,400 common shares of Fidelity Company on January 10, 2012, for $12 per share and acquired 15,000 common shares of Essem Corporation on January 25, 2012, for $22 per share. Fidelity has 60,000 shares of common stock outstanding, and Essem has 50,000 shares outstanding.
On March 20, 2012, Reeder Company acquired 100,000 shares of Needed Industries common stock at $32 per share as a long-term investment. Needed has 250,000 shares of outstanding voting common stock. The following additional information is presented for the calendar year ended December 31, 2012:Nov.
The following activities relate to Merrill Company during the years 2011 and 2012:2011Feb. 15 Merrill purchased 10,000 shares of Hendershot Equipment stock for $40 per share.Dec. 1 Merrill received an $0.80-per-share cash dividend from Hendershot.31 Hendershot common stock had a closing market
During January 2012, Danbury, Inc., acquired 40,000 shares of Ernst Corporation common stock for $24 per share. In addition, it purchased 5,000 shares of Tsao Corporation preferred (nonvoting) stock for $112 per share. Ernst has 160,000 shares of common stock outstanding, and Tsao has 12,000 shares
On January 2, 2012, Drexello, Inc., purchased $75,000 of 10%, five-year bonds of Fast Trucking as a held-to-maturity security at a price of $77,610 plus accrued interest. The bonds mature on November 1, 2016, and interest is payable semiannually on May 1 and November 1. Drexello uses the
Parent Company owns parts of three different subsidiaries. The balance sheets and income statements for these four companies are listed below. Note that, in the financial statements of Parent, its ownership interest in the third subsidiary has been accounted for using the equity method.Required:1.
Warner Company started business on January 1, 2011. The following transactions and events occurred in 2011 and 2012. For simplicity, information for sales, inventory purchases, collections on account, and payments on account is given in summary form at the end of each year.2011Jan. 1 Issued 150,000
Define capital budgeting. Give two examples of long-term investment decisions that require capital budgeting.
Why do long-term capital investment decisions often have a significant effect on a company’s profitability?
Why is the time value of money so important in capital budgeting decisions?
If the time value of money is so important, why isn’t the timing of cash flows emphasized in the accounting cycle?
How is depreciation expense treated when the discounted cash flow methods are used? Why?
How are cost savings and increased revenues related in capital budgeting?
Identify four capital budgeting methods, and explain why some are considered better than others.
Why is the payback method inferior to the discounted cash flow methods? When is the payback method helpful?
What is the major weakness of the unadjusted rate of return method?
Does a net present value of zero indicate that a project should be rejected? Explain.
As the desired rate of return increases, does the net present value of a project increase? Explain.
Under what circumstances might a project with a negative net present value be accepted?

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